Crowd funding for unsecured personal loans is interesting in that it spreads the risk and potentially dangerous in that it may attract investors who ignore the risk factor. It is also unique in making loans that do not add to the money supply via fractional reserve banking.

An article in this week’s The Economist reports on some American firms that are making crowd sourced loans to individuals usually to consolidate and reduce the cost of credit card borrowing. This model means borrowers get a cheaper interest rate and depositors get more on their deposits. This is different from crowd sourced funding for business development although both involve risk.

When ever one makes a loan, either directly or though an intermediary (a bank deposit) one is transferring purchasing power to somebody else. Mostly one hopes to get more purchasing power (interest or dividends) back. There are three risks in doing this: a government may decide to give you a haircut, the person may default or you may get caught by inflation. We can try to protect ourselves from default by purchasing deposit insurance. I don’t know how to protect ourselves from a haircut or inflation. Maybe by supporting the Tea Party. These risks will always be there no matter how bankers try to offload them.

As I understand it the crowd loan companies allow you to put a small amount of money into a number of loans. Each amount is tied to that loan and your deposit is returned to you if, as and when the borrower repays the loan. This allows you to spread your risk among a number of borrowers. This may let lenders think they are reducing their risk but most business and financial models work well when the economy is growing and have problems when growth declines. There is some probability our economy will continue to decline for some time to come. Here is the risk statement of one of these companies.

I like that this way of funding loans does not involve fractional reserve banking and thus has a neutral impact on the money supply.

I fear that too many people will see the higher interest rates being paid on deposits and ignore or not realize the risk involved. If and when the risk becomes reality, there will be a lot of crying and screaming and possibly a lot of suffering.

It may be that the risk in crowd funding is no greater than with other forms of saving/making loans. It is just a little more obvious. I still think that given the current economic situation the best investment is a market garden.

Free ebook

Cover Notes

After my first family broke up I went to the University of British Columbia and did a degree in economics because I was intrigued by the way in which money is created and because I wanted to understand the dynamics of how we exchange goods and services.

I concluded economics is mostly about relationships and we should evaluate economic policies by how they contribute to good relationships.

We have two major economic problems with which we should be dealing. The first is that while we have lots of energy and mineral resources left on this planet, we have used up the most easily accessible. Those that are left require an excessive amount of energy to extract. The second major problem is that our so-called "market" economy is largely based on legislation which restricts competition and thus allows some people an unequal share of the agricultural surplus.

To deal with these problems we need to focus our economy on a policy of sharing in the same way that families and people in small-scale societies share their food. We also need a universal guaranteed income scheme AND a new way of creating money. This would be a tremendous transfer of decision-making power from governments and bankers to individuals.

In this book you will learn:

why the economic principles of marginal cost and the elasticity of the demand curve say it should be priced at 99 cents.

why relationships are an important part of economics.

what it takes to make a good relationship.

that our civilization is based upon a huge agricultural surplus which should be considered an inheritance to be shared equally by everyone.

how the financial and the physical aspects of the economy interact.

how money is created out of thin air and the problems this creates for our well being.

how we can finance a guaranteed annual income scheme.

how to become a part of the ten percent,

how not to become a slave.

The list of ebook stores from which you may download this book is at the top of the home page.

Free ebook

You may download a free copy of this ebook from Smashwords
click here
Use the coupon code LE78V

Posts according to the number of times they have been viewed as of April 2012